Argentina's debt battle with the US courts has taken yet another twist after a judge branded its latest efforts to avoid paying the vulture fund holders of bonds from its default in 2001 as “illegal”.

Hedge funds led by New York billionaire Paul Singer’s NML Capital swept up bonds cheaply in the wake of the 2001 default. They have refused to accept a debt restructuring, unlike most other bondholders who exchanged their debt for lower-value bonds.

In 2012 Judge Thomas Griesa ordered Argentina to pay the recalcitrant hedge funds $1.33 billion (£802 million) plus interest when it next made a payment to holders of the exchanged bonds.

Argentina, led by president Cristina Fernandez, has refused to comply as this would trigger much bigger payments to the holders of the exchanged bonds. Griesa froze an interest payment to the holder of exchanged bonds in June, pushing Argentina into a second default in 13 years.

Fernandez this week announced plans to circumvent the judge by making interest payments to other bondholders through her nation’s central bank rather than the US banks subject to Griesa’s orders.

“It is illegal, and the court directs that it cannot be carried out,” Griesa said. The president’s bill would make state-controlled bank Banco Nacion the intermediary for bondholder payments instead of BNY Mellon.